Mortgage lenders look at debt to income (DTI) when they are qualifying you for a mortgage. Your DTI is your monthly debt to your gross monthly income. This number is used to calculate how much home you can afford. Mortgage companies use debt to income to calculate what your maximum payment can be.
Your DTI doesn't tell your willingness to pay your debt, just your ability. Lenders will look at your credit history to determine your willingness to pay your debt. They look at your DTI to determine the maximum you can borrow.
Typically most lenders will calculate your monthly income by looking at your w2's, tax returns and paystubs. Once they figure out your gross monthly income, they look at your monthly debt. If you are paid hourly or salary, it's a little easier to figure out your income. If you are self employed, they have to average you income over the past 2 years. For those that are commission or get overtime, we need a two year history and we will average that income. If the overtime, commission or even self employment income is dropping, we may just average the last 12 months.
When lenders look at your debt, they take your monthly credit card payments (the monthly minimum payments), your student loan payments, car loans, child support and any other monthly payments. Sometimes deferred student loans may not be used but it depends on the program and how long they are deferred for.
DTI may have a front limit and a back limit -for example, if your house payment is $1200, your income is $4000 and your other monthly debt is $350, your DTI will be 30/38.7. So your house payment is 30% of your monthly income and your total debt including your house payment is 38.7% of your income. Most progams limit your total DTI to 41-45% of your income. The lower your DTI, the better.
There are times you may have a higher debt to income and with compensating factors, that is ok. An underwriter may approve a higher debt to income for borrowers that have a substantial amount in a savings account to help cover emergencies, or for those with a very high credit score or possibly a spouse that is not on the mortgage but has income. If you have some compensating factors, talk to your lender about your options.
Leslie Vanderwerf, NMLS ID#335509, American Mortgage & Equity Consultants – Email – Website
